Economy in Brief

The GfK measure of consumer confidence in the UK rebounded slightly in October to a -47 reading from a -49 level in September- which is its all-time low. The two-point bounce is extremely small given the weak level of the September reading. The outlook for the period ahead, over the next 12 months, sees slight improvements in the household financial situation and for the general economic situation, although both continue to have extremely weak readings when it set against the background of their historic range of values. Both those readings are weaker historically less than one-half of one percent of the time. Both readings reach all-time lows in September and rebound weakly in October. The outlook for unemployment continued to be moderate and fell in October.

Retail sales are weak - Keep your eye on volume data The background in terms of the consumer confidence is extremely weak. It's not surprising that sales in September fell by 1.5% in nominal terms and by 1.4% in real terms. Over 12-months nominal sales are up by 3.8%, while real sales - sales volumes- are down by 6.9%. Inflation has become an extremely decisive factor in understanding anything in the UK economy. For example, the ranking of the year-over-year sales rate has a 60.2 percentile ranking in its historic queue of data. That’s a moderate reading, above its historic median. On the other hand, the ranking of the year-on-year percent change in real retail sales (volume) has a 0.8 percentile standing- a standing in the bottom 1% of its historic queue of data. Clearly, to understand what's going the inflation adjusted data are the way to go - and these data are weak.

Sales volumes are weak, and weakness is accelerating Retail sales data show a decline of 6.9% over 12 months, they show decline of 8.2% at an annual rate over 6-months, and a decline of 11.4% at an annual rate over three months. UK retail sales are slipping, and they're rate of decline is accelerating. The economy appears to be careening toward recession with consumer spending this weak it would be hard to imagine the economy continuing to expand. In the quarter to-date retail sales volumes are down at a 7.3% annual rate; the volume number completes the economic picture for the third quarter. ONS has reported a DGP decline from July and August and has noted that growth of 1% in the economy for September would be necessary to prevent a quarterly decline. The recession cake appears to be in the oven and nearly baked.

UK CBI survey confirms weakness Surveys of UK retail sales show marked deterioration in September compared to August, a Confederation of British Industry CBI) report shows. Retail sales for the time of year record a survey level of -10 compared to +12 in August. The CBI volume of orders measured year-over-year also shows a net negative -17 reading in September compared to +14 in August.

The queue standings for these CBI readings are still not as weak as the retail sales volumes themselves. The retail sales for time of year have about 45-percentile standing while the volume of orders year-over-year has a weak 18.6-percentile standing. The CBI survey does show encroaching weakness, however, the weakness in real retail sales appears to be much more severe than what's being picked up by the survey at least as of September. And the survey in September took a sizable turn for the worse compared to August, so it could be that retailers are just beginning to appreciate the depth of their problem situation.

Summing up Economic conditions in the UK clearly are weakening. Inflation rate is high; over 3-months (using the HICP as a benchmark) inflation is up by 6% and while that's down from the year-over-year pace of 10.1% it's still a high inflation rate and, in September, the measure advanced by 0.4% month-to-month not an indication that pressures are cooling very much. However, the Bank of England has a difficult job because the inflation rate is high and yet the economy is cooling – on the brink of recession. This will call for a very careful modulation of policy to control rising inflation and not to exacerbate the economic slide that appears to be underway. The UK also has political leadership problems: the recent resignation of the Prime Minister just set a record for the shortest term in the history of British politics. Now the government needs to reconvene and pick a new leader at a time that economic conditions are difficult and their choices, once again, are going to be contentious. The UK finds itself between a rock and a hard place at a time that global inflation is high, the global economy is sliding, there's a war in Ukraine, and energy prices continue to hover at high levels. It's not an enviable situation but it is what they face – a lot of tough choices.

Germany's PPI for September excluding construction rose 2.4% after a 7.9% monthly gain and in August and a 5.3% monthly gain in July. The three-month growth rate for the headline PPI is an astounding 83% annualized, as well as a 49% annual rate over 6-months and a 45% annual rate over 12-months. However, 12-months ago the year-over-year rate was rising at a 66% annual rate. Germany has been fighting off this headline inflation problem from the PPI for quite some time.

The ex-energy inflation rate is much better behaved, but not without its problems. The PPI ex-energy rose by 0.5% in September after a 0.4% gain in August and in July. Over 3-months it's rising in a 5.1% annual rate, compared to an 11% annual rate over 6-months and a 13.8% annual rate over 12-months. One year-ago the PPI excluding energy was rising at an 8.6% annual rate.

The UK inflation metric for September continues to run hot. The CPIH has increased by 0.4% in September after rising by 0.3% in August and 0.7% in July. Its three-month rate of growth is at 5.7%, clearly excessive, relative to the 2% target of the Bank of England, however, there is substantial deceleration from the 6-month annualized pace of 9.4%; the 3-Mo pace also is weaker than the 8.8% pace over 12-months. Still, one year ago this month this measure was increasing at a 2.9% annual rate also above target but this month’s year-over-year gain of 8.8% as well as its lower 3-month pace exceeds the year-over-year pace from a year ago.

The same measure excluding food alcohol and tobacco (that I will refer to as the core) increased by 0.4% in September after rising 0.5% in August and 0.4% in July. This measure runs at a 5.6% annual rate over three months and has accelerated compared to 6-months where the rate was 5.2% annualized. The 5.6% pace compares to a 12-month pace of 5.8%, barely any deceleration at all.

Core shows mixed results: the 6- and 6-Mo pace are off peak; 12-Mo still accelerating All the acceleration in the UK CPI measure over three months is in the core reflecting a diminished rose for energy and food prices; core inflation continues to run hot and shows no real sign of deceleration as it runs at a rather steady too-strong pace.

The diffusion calculation which measures the breadth of inflation across 10 categories plus the core measure shows diffusion at 45.5 in September. For diffusion, the key value is ‘50.’ Above 50 more than half of the components are showing inflation acceleration period to period. Whereas, below 50, more of them are showing deceleration. These measures are comparing the breadth of inflation’s rise or fall in one period to another period. In August, inflation accelerated with diffusion at 54.5 indicating marginally more acceleration than deceleration for the inflation rate. But then in July, despite a headline gain of 0.7%, and a core gain of 0.4%, the month-to-month diffusion measure clocked 27.3 indicating a broad step down in inflation compared to the month before (when the headline rose 0.8% and the core by 0.7% month-to-month).

Sequential data show diffusion at 63.6 over 3-months compared to 6-months. The 6-month measure shows diffusion at 54.5 compared to its 12-month pace. Over 12-months diffusion is at 100 indicating acceleration in inflation across all the categories compared to the inflation rate of 12-months earlier.

The sequential numbers show us that inflation is not simply the matter of one or two categories that are accelerating because the breadth of inflation is clearly across most categories and is not the result of some intense increases in just a few categories with large weights that are driving the headline higher. This is the sort of information that diffusion can deliver to us.

**The United Kingdom continues to have inflation problems **with strong inflation represented in the headline pace and the core pace and across all the sequential time horizons. UK inflation trends muddles without a clear-cut patterns and with the pace of inflation, however measured, simply far too high. The inflation news may not be terrible and may not be a lot worse this month than last month...but it’s not any better either. At the same time the economy is facing weaker growth; that combination of events puts the Bank of England in a difficult spot. UK policy is in an extremely challenging situation. The government's intended fiscal plan has been forced to be withdrawn after it had adverse market effects. But the central bank will certainly stay on a tightening path but will be able to move in a more measured pace because of the encroaching weakness of the economy and some of the financial market jitters that have emerged.